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The choice between joint ventures and nonequity-alliances: evidence from Italian firms

Antonio Majocchi, Ulrike Mayrhofer, Joaquin Camps

To cite this version:Antonio Majocchi, Ulrike Mayrhofer, Joaquin Camps. The choice between joint ventures and nonequity-alliances: evidence from Italian firms. 36th Annual EIBA (European International BusinessAcademy) Conference, Dec 2010, Portugal. 23 p. �halshs-00690216�

1

36th

Annual EIBA (European International Business Academy) Conference,

University of Porto, December 9-11 2010

The choice between joint ventures and non equity-alliances: evidence from Italian firms

Antonio Majocchi, Ulrike Mayrhofer and Joaquin Camps

A. Majocchi, Dept. Ricerche aziendali “R. Argenziano”, Faculty of Economics, University of

Pavia, via S. Felice, 5 – 27100, Pavia, Italy

Corresponding author: Antonio Majocchi, Tel + 39 0382 986467, Fax + 39 0382 986228,

email: antonio.majocchi@unipv.it

Abstract: This paper investigates the factors affecting the choice between joint ventures and

non-equity alliances, when firms enter foreign markets. Using a database of Italian firms

compiled by the authors with 879 observations, we test the possible effects of firm specific

characteristics, host country institutional characteristics and cultural distance on alliance

mode choice. Using both transaction cost analysis and the resource based view, our findings

demonstrate the crucial role played by firm size and by institutional and political features of

host countries. The results concerning the role of functional activities involved and the

industrial sector are mixed. Overall, our analysis shows that it is necessary to develop a more

integrated approach to understand this complex choice made by firms when expanding

abroad.

Keywords: Market entry modes, Joint ventures;·Strategic alliances.

2

1 Introduction

In a context of globalisation of markets and competition, companies need to increase their

international market presence. The choice of market entry mode is one of the most critical

elements of a firm’s foreign investment strategy (Root, 1994; Kumar and Subramaniam 1997;

Nakos and Brouthers 2002). When conquering foreign markets, firm frequently choose to

establish alliances with local companies (Dunning 1995; Guidice and Mero 2007). Firms

increasingly use this entry mode choice to access market and resources worldwide. Alliances

can be defined as medium and long term agreements between companies, which involve the

mutual transfer of intangible resources such as technology or human skills with or without the

development of a dedicated administrative structure (Pisano 1989; Oxley 1997). Once firms

have decided to expand internationally with a partner, they can use either the equity form

(joint ventures) or a non-equity form (non-equity alliances).

The objective of the present paper is to identify the factors that are likely to affect the choice

between equity and non-equity agreements. The study empirically explores the determinants

of the choice between joint ventures and non-equity agreements contributing to a field that is

very important in terms of number of deals but that still requires further investigation

(Globerman and Nielsen 2007). Using a database compiled by the authors for this specific

purpose, covering both large and small- and medium-sized firms, we test some of the

determinants affecting the alliance mode choice. The paper is organised in the following way.

Firstly, the theoretical framework and the research hypotheses will be developed. Then, the

research methodology will be explained, and the findings of the empirical study will be

discussed. Finally, we will outline major limitations and perspectives for future research.

3

2 Theoretical framework

Factors affecting the choice between joint ventures and contractual agreements can be

classified into three main categories: (1) country specific, (2) industry specific and (3) firm

specific factors. Concerning country specific factors, previous research shows that factors

such as cultural distance between the firm's home country and the host country (Leung et al.

2003; Chen and Hu 2002; Gillespie 2002), institutional aspects such as the progresses in

market institution building (Meyer, 2001) or the foreign exchange rate and the host country

currency characteristics (Baek and Kwok, 2002) or the level of environmental uncertainty

(Lòpez-Duarte and Garcìa-Canal 2002) can play an important role. Industry specific factors

such as market size, market structure, or the level of industry barriers have also proved

influential (e.g. Chen and Hennart 2002; Siripaisalpipat and Hosbino 2000). Many authors

have emphasised the impact of firm specific factors such firm resources and firm size (Leung

et al. 2003) or the level of international experience of firms (Reuber and Fisher 2003; King

and Tucci 2002) or the characteristics of CEOs (Herrmann and Datt 2002).

As far as the theoretical framework is concerned, most available studies have used

Transaction Cost (TC) economics as their main theoretical framework to analyse the

determinants of this strategic choice (Brouthers and Brouthers 2003). In the TC view, it is the

level of uncertainty surrounding market transactions that determines the cost of this specific

entry mode. TC theorists (Williamson, 1985; Gatignon and Anderson, 1988; Nakos and

Brothers 2002) identify two kind of uncertainty: behavioural uncertainty and environmental

uncertainty with the first referring to the risk of any opportunistic behaviours by partners and

the second referring to all the risks that are generated by the entry in an unknown country.

When the perceived risk associated with the new environment is considered as high, firms

tend to avoid committing resources and to select non-equity entry modes.

4

Recently, several authors have criticised the transaction cost approach pointing to the fact that

TC analysis only takes into account internal but not external resources that firms have and

that can lower the transaction costs related to the entry mode choice (Thuy and Quang, 2005).

This criticism suggests the adoption of complementary approaches to the entry mode dilemma

such as the institutional perspective (Yiu and Makino, 2002) or the resource-based view

(RBV). Tse et al. (1997) with regards to the case of investment in China have analysed the

effects of country-specific, industry-specific, and operation-related factors on market entry

strategy through either export or licensing or joint ventures or wholly owned-subsidiaries.

More specifically, their analysis shows how host and home country characteristics are

important in determining entry mode decisions. With regards to the resources developed by

firms Davidson (1982), and Anderson and Gatignon (1986) suggest that international

experience is a resource affecting the governance of foreign transaction since firms with more

international experience tend to adopt a high equity entry mode. The study conducted by

Cantwell and Colombo (2000) shows that technological competencies and technological

similarity between partners are variables that affect the choice between equity and non-equity

agreements with close technological specialisation leading to greater likelihood of non equity

arrangements. However, their analysis is limited to the information technology sector and

lacks observations concerning joint ventures, thus limiting its generalisation.

Several authors have emphasised the necessity to adopt a more integrated approach when

analysing the choice between equity and non-equity alliances. For example, Hill et al. (1990),

and Yiu and Makino (2002) estimate that TC economics offers a useful but only partial

explanation of the complex phenomenon. More specifically, the TC approach seems well

suited to interpret the cost effects on firms of the alternative modes of governance but needs

additional theoretical approaches to fully capture the complexity of the process. In this

research, we have thus decided to adopt an integrated framework in order to study the alliance

5

mode choice. Combining two approaches that are frequently used in the field, that is

transaction cost theory and resource based-view, we focus on a few features that are likely to

affect alliance mode choice, namely industry features, activities of the value-chain involved in

the agreement and characteristics of the host countries. This last point is of special interest. In

recent years, a lot of effort has been made to examine the impact of specific factors on entry

mode decisions and among these factors institutions attracted the most attention. Some

contributions extended the Transaction Cost theory by adding institutional factors to the given

framework (Brouthers 2002; Lu 2002). Others argued that institutions modify the uncertainty

surrounding transactions (Said and McDonald 2002; Meyer 1998). We develop this analysis

adding some specific variables to the effect of cultural distance. The specific variables

introduced in our model test the effects of aspects that may affect alliance mode choice, but

that have not been widely investigated. These effects refer to variables developed in order to

measure the level of legal rights protection and the level of political risk surrounding foreign

investments in a country. We first consider several variables proposed by the TC approach

and then we also take into account variables suggested by the RBV.

In the transaction cost approach, the role of intangible assets is considered as crucial in

driving firms towards a more hierarchical mode of governance. For example, Gatignon and

Anderson (1988) and Hennart and Larimo (1998) find a positive relationship between R&D

intensity and the probability of creating a wholly owned subsidiary rather than a JV.

Brouthers (2002) underlines how the firms operating in high-technology sectors tend to have

a higher assets specificity of their investments that leads to higher risk of opportunistic

behaviours by partners. Therefore, he suggests that TC theory supports the view that more

integrated modes provide more efficient organisational structures when there is a threat from

opportunism. We can thus consider that, when firms exchange knowledge, a highly specific

6

asset with a high degree of uncertainty, more integrated forms are preferred. This tendency

should be stronger in industries where research input is an essential part of the production

chain and an essential factor in developing a competitive advantage, as it is the case in

science-based sectors. Therefore we can propose the two following hypotheses:

H1: Firms that form agreements involving R&D functions tend to chose joint ventures rather

than non-equity alliances.

H2: In science based industries, firms are more likely to choose joint ventures rather than

non-equity alliances.

Recent IB literature relying on the works by North (1990) underlines the role that institutional

features have on corporate strategies. Brouthers et al. (2002) and Meyer (1998) demonstrate

how institutional characteristics of the host country can impact investment strategies affecting

the uncertainty involving foreign transactions. More specifically, Brouthers (2002) shows that

the legal framework can play an important role. Countries where the legal structure is less

developed and where legal protection for foreign entities is low are perceived as more risky

by foreign firms. Joint ventures, when associating local partners, allow foreign investors to

hedge against the political risk of government intervention (Chen and Hennart 2004; Lòpez-

Duarte and Vidal-Suàrez 2008). When entering foreign markets, the legal restrictions and the

political hazard are considered as sources of risk and this risk can be better hedged with the

presence of a local partner. Consequently, a high level of risk in the host country favours a

less hierarchical entry mode. However, this conclusion does not hold in the same way when

firms evaluate the possibility to enter the market either with an alliance or with a JV. In this

case, the choice to have a partner in the host country has already been made and the firms

must evaluate whether to enter the market with an equity stake (JV) or with a non equity

7

agreement. Here, the low level of legal protection and the high level of political hazard are

sources of risk that increase the transaction costs of the agreements (both equity and non

equity). In this case, according to TC theory, a more hierarchical form of agreement will be

preferred thus favouring JV agreements rather than non equity entry modes. Moreover, the JV

alternative is seen as a stake in a local concern and the presence of a joint investment with a

local partner is seen as an insurance against possible retaliation by the foreign government.

We thus suggest two hypotheses on the effects of the legal and political environment on

alliance mode choice:

H3a The lower the legal protection in a country, as measured by the efficiency of contract

enforcement, the more likely it will be that firms choose joint ventures rather than non-equity-

alliances.

H3b The higher the political hazard in a country, the more likely the probability that firms

choose a joint venture rather than a non-equity alliance.

Despite the increasing globalisation of markets, distance still influences internationalisation

strategies. More specifically, cultural distance plays an important role when firms decide to

enter new markets (Erramilli and Rao 1993; Hennart and Larimo 1998). Kogut and Singh

(1988) argue that differences in culture between home and host countries increase the level of

risk in integration processes, and thus lead firms to choose less risky agreements. More

generally speaking, the more distant the culture between home and host countries, the more

difficult and expensive is the process of adaptation to the new environment for the firm. The

lack of knowledge increases the cost and the risk of the market entry so most of the scholars

assume that the larger the cultural distance the lower the preference for internal modes of

8

entry. Therefore, we assume that firms prefer to enter distant markets with a non-equity

alliance in order to gain knowledge and we posit that:

H4: The higher the cultural distance between the home and the host country, the more likely

firms will choose non-equity alliances rather than joint ventures.

Recently, several scholars used the resources-based view to interpret entry mode choice

(Ekeledo and Sivakumar 2004). The two views are not necessarily conflicting as TC focuses

mainly on the cost of governing foreign transaction while RBV underlines how foreign entry

is a means to increase firm resource endowments (Meyer et al. 2009b). More generally, the

RBV underlines how firms choose their entry mode in foreign markets on the basis of both

the existing resources they control and on the basis of the ones they would like to have access

to. As argued by Grant (1991), firm size defines the scope of its own resources and what a

particular firm can and cannot do. It thus reflects available resources. In fact, larger firms,

which have more resources in terms of managerial and organizational knowledge, will tend to

look more for complementary resources and less for new knowledge. This will lead large

firms to prefer equity forms. Conversely, small firms, being limited in the resources that they

control, will prefer non equity arrangements. Consequently we posit our last hypothesis:

H5 When small firms are involved, it is more likely that they will choose a non-equity alliance

rather than a JV.

Figure 1 presents the conceptual framework of our research. The model illustrates the possible

effects of five variables on alliance mode choice: firm resources proxied by firm size, host

country institutional characteristics, the industrial sector of the agreement, the

9

internationalisation strategy of the firm and the activities of the value chain concerned by the

agreement.

Figure 1 Factors affecting alliance mode choice

3 Methodology and definition of variables

3.1 The sample

The empirical investigation is based on a sample of 879 interfirm agreements concluded by

Italian firms with partners from all over the world. The observation period extends from 2000

to 2006. The database, compiled by the authors, covers announced agreements reported in “Il

Sole 24 Ore”, the main Italian economic newspaper. The collected information has been

verified through web sources and press releases regarding the firms involved in the

agreements. Data extracted from the press has frequently been used to identify cooperative

alliances (Mayrhofer 2004). In our database the percentage of joint ventures is 54%. The

geographic origin of partner companies is mainly Europe (42%), followed by the United

States and Canada (20.9%), and China (12%). The industry distribution of the sample is fairly

JV vs. non-equity alliances

Firm resources

Host Country

characteristics

Industrial sector

Internationalisation

strategy

Activities of value-chain

10

representative of the Italian industrial and service structure. Firms operating in the traditional

sectors cover 11% of the sample, scale-intensive firms are 34 %, the energy and utility sectors

cover 9%, the trade sector 7% and the residual sector (mainly financial and

telecommunication industries) represents 28% of the total sample.

3.2 The variables

The variables that have been extracted and used in the model are reported in table 1. The

dependent variable is the contractual form of the agreement which has been coded 1 if the

agreement takes the form of a joint venture and 0 if the agreement is a non-equity alliance.

The variables used in the model concern the following categories: the geographical scope of

the agreement, the country characteristics of the host country, the size and the industrial sector

of the Italian firms and two other firm characteristics namely: the international strategy of the

firm and the main functional activity concerned by the agreement.

11

Table 1: variable definition

Construct Variable definition and scale

Hypothesis

(expected

sign)

Variable Name

Contractual form JV =1 - Alliance = 0

Nace Sector Code

(Pavitt classification)

Dummy variable

1. Primary activity

2. Traditional sector 3. Scale-intensive sector

4. Specialized suppliers

5. Science-based sectors 6. Energy sector , gas and water

7. Wholesale trade and retail trade

8. Financial activity communication & other services

H1

(-)

S_primary 1

S_trad 2 S_scale 3

S_spec 4

S_science 5 S-enregy 6

S-trade 7

S_othersr 8

Value chain activities

involved in the agreement/JV

Dummy variable

Dummy variable: 1. Infrastructure

2. R&D

3. Procurement

4. Logistic

5. Human resource Management

6. Production 7. Marketing and Sales

H2

(-)

Infras R&D

Proc

Logistic

HR

Prod

Mkting

Enforcing contracts

From - ∞ to = 0, with 0 = highest level of legal protection

H3a

(-)

Enfcon

Political constraints

From 0 to 100 with 100 = low political hazard

-H3b (-)

Costri

Cultural distance

Kogut & Singh index. The index has been adapted to Italy and is

represented algebraically as:

CD j 4//4

1

2

I

iiuij VII

where CDj is the cultural difference of the jth country from Italy, Iij

represents the index of the ith cultural dimension and the jth country, u

stands for Italy and Vi is the variance of the index of the ith dimension.

H4 (-)

Cult_dist

Size of enterprise

Dummy variable

<49 employees Small

49-499 employees H5

(-) Medium

>500 employees Large

Control Variables

Credit rating 1-100 (100= high rating grade), OECD data Rating

Investor protection index 0-10 (10=high investor protection) (World Bank, doing business

with database)

Invpro

Global competitiveness index 1-10 with 10 = high global competitiveness (World Economic

forum)

Compet

Firm strategies

Dummy variable

Risk reduction

Economies of scale and or rationalization

Complementary technologies and patent Co-opting or blocking competition

Overcoming government-mandated investment or trade barrier

Initial international expansion Quasi-vertical integration

Risk

Scale

Compl-tech Comp

Barriers

Int exp QV-intergr

Area destination

Dummy variable

1. Western Europe (EU-15 + Switzerland) 2. East Europe (rest of Europe)

3. Russia

4. United States and Canada

5. Latin America

6. Japan

7. Cina 8. India

9. Rest of Asia

10. Other countries

Area 1 Area 2

Area 3

Area 4

Area 5

Area 6

Area 7 Area 8

Area 9

Area 10

The functional content of an alliance represents the activities of the value chain that are

primarily concerned by the agreement. The activities that have been coded using a dummy

12

variable are: Logistics (Logistic), Operations (Prod.), Sales and marketing (Mkting) with

regards to the primary activities. The support activities are: Procurement (Proc) Human

Resource management (HR) Research and Development (R&D) and Infrastructure (Infras)

i.e. the functions of departments such as accounting, legal, finance, planning, public affairs,

government relations, quality assurance and general management. The variable sector (Sector)

defines the main industry sector of the firm promoting the agreement. In order to code the

industry, we use the NACE nomenclature of economic activities provided by the European

Commission. Using the well-known Pavitt (1985) taxonomy the NACE codes have been

recoded. We end up with a total of 8 industrial sector dummy variables: the primary sector,

the four Pavitt sectors (traditional, scale-intensive, specialised suppliers and science-based

sectors), the utilities sector (energy gas and water), the trade sectors and a residual sector.

With regards to the institutional characteristics of the host country we have taken different

variables into account. The first variable measures the degree of protection of contracts in a

country (Enfcon). We use an index produced by the World Bank, the Enforcing contracts

index, that measures the efficiency of the legal system in resolving commercial disputes in a

country averaging three main indicators: the number of procedures from the moment the

plaintiff files a lawsuit in court until the moment of payment, the time in days to resolve the

dispute, and cost in court fees and attorney fees. The index measures the efficiency of contract

enforcement. In the model, the index has been inserted with a negative sign so that lower

values of the index correspond to lower values of legal protection and efficiency in contract

enforcement. The level of political risk in the country has been measured using the political

constraints index (Costri) developed by Henisz (2000). The index underlines the differences

between policy systems of different countries measuring the extent to which a given political

actor is constrained in his or her choice of future policies. We have scaled the index on a 100

basis so the possible scores for the final measure of political constraints range from zero for

13

the most hazardous countries to 100 for the safest. It must be noted that, since the measure of

political risk we have used assigns a lower value to the most risky countries, we predict a

negative relationship between the political risk variable and the entry mode choice: riskier

countries with a lower value of political constraint index will attract, ceteris paribus, more JV

than non-equity agreements. The index has been calculated as the average of the values of the

index over the last five years. The cultural distance measure relies on the usual Hofstede

(1980) index. However, because most of the studies (Barkema et al. 1996) use a composite

index we also follow this approach. More specifically, our variables measuring cultural

distance (Cult_dist) have been constructed on the basis of the Kogut and Singh (1988) index,

a composite index of cultural distance that is based on the deviation along the first four

dimensions of Hofstede’s framework and that has been extensively used in the study of

foreign market entry (Morosini et al., 1998). Following similar empirical studies (Majocchi et

al. 2005), we proxy the firm resources with the firm size at the time of the agreement. Using

the numbers of employees, three classes can be defined: small, medium and large firms. The

smaller group is made up of firms with less than 50 employees, the medium firms have a

number of employees between 50 and 499 and large firms are those with more than 500

employees.

As usual in empirical work, a series of control variables have been introduced. A first dummy

variable identifies the country of destination in order to catch all the potential host country

effects not defined in our previous variables. We defined 10 regions as reported in table 1.

Then we insert an index measuring the level of Investor protection (Invpro). This index is

computed by the World Bank and measures the strength of minority shareholder protections.

The index ranges from 0 to 10, with higher values indicating more investor protection.

Moreover, in order to identify potential effects caused by different strategies we identify the

motives behind alliance decisions. This variable has been defined according to the firm goals

14

as stated in the press reports or in the press releases regarding the agreements. In order to

classify the internationalisation strategy we use the taxonomy proposed by Contractor and

Lorange (1988). In their landmark work on alliances, they underline the strategic reasons

behind the choice to develop alliances. According to this taxonomy, each agreement can be

classified in one of the following cases using dummy variables:

Risk reduction (Risk) i.e. product portfolio diversification; dispersion of fixed cost,

etc.

Economies of scale and or rationalization (Scale) i.e. lower cost by using the

comparative advantage of each partner, etc.

Overcoming government-mandated investment or trade barriers (barriers); i.e. to

operate as a “local” entity because of local partner, etc.

Co-opting or blocking competition (Comp); i.e. defensive joint ventures to reduce

competition or offensive joint ventures to increase costs and/or lower market share for

a third company, etc.

International expansion (Int exp); i.e. benefiting from local partner’s know-how, etc.

Complementary technologies and patent (Compl-tech); i.e technological synergy or

exchange of patents and territories, etc.

Vertical quasi-integration (QV integration); i.e access to technology, labour capital or

to distribution channels, etc.

Finally, two other indexes have been inserted as control variables in order to measure the

overall risk of the host countries: one that measures the economic development of the country

and one that measures the level of solvency of public finances. The first index the Global

Competitiveness index (Compet) produced by the World Economic Forum considers a

collection of factors, policies and institutions which determine the level of productivity of a

country and that, therefore, determine the level of prosperity that can be achieved by an

15

economy. The index ranges from 0 to 100 with the higher values corresponding to higher

levels of competitiveness. The second index is an index of financial stability (Rating) and it

has been taken by OECD. The index is a financial indicator to potential investors of debt

securities issued by the State. In the context of our analysis it is another measurement for the

overall financial and economic risk affecting the target country. The variable ranges from 0 to

100; the higher the rate the better the state of public finances and the lower the overall risk in

investing in the country.

3.3 The Model

We test our hypothesis using logistic regression techniques, the standard logit procedures of

the Intercooled Stata 9 package. Logistic regression is used in order to estimate the incidence

of the independent variables on the probability that firms will choose either a non-equity

alliance or a joint venture. Since the variable “agreement” takes the value 0, if partners decide

to collaborate on a non-equity basis, and 1, if the operation takes the form of joint venture. A

positive sign of the coefficients indicates that an increase in the value of the independent

variable will increase the probability that the firm will choose a joint venture rather than a

non-equity agreement. As usual for group variables, a variable has been dropped in order to

avoid the dummy variable trap (perfect multicollinearity). The sign of the coefficients for

these variables should be interpreted with regards to the variable that has been dropped and

that acts as a reference variable (Greene 2003). The descriptive statistics and the correlation

coefficients of the variables (dummy variables excluded) are reported in table 2. Data show

that, given the low value of the correlation coefficients, multicollinearity is not a concern for

this analysis.

16

Table 2. Descriptive statistics and correlation table

(dummy variables excluded)

Mean Std. D. (1) (2) (3) (4) (5) (6)

cult_dist (1) 1.28 .989 1

Costri (2) 39.37 14.61 -0.651 * 1

Compet (3) 50.77 6.67 -0.624 * 0.544 * 1

Rating (4) 94.30 11.81 -0.339 * 0.314 * 0.644 * 1

Invpro (5) 6.018 1.61 -0.242 * 0.047 0.396 * 0.238 * 1

Enfcon (6) 368.66 220.80 0.001 0.128 * -0.310 * -0.487 * -0.181 * 1

* = significant at the 0.01

The results reported in table 3 are those of the general model (model 1) where the coefficients

of the country variable have not been reported for reasons of simplicity (they are not

statistically significant). The second model (model 2) is the restricted model where, due to the

low significance of the coefficients, country ratings and the dummies on the geographical

areas have been dropped. A likelihood ratio test comparing these two models confirms that

the reduced model is as relevant as the full model. Overall, the model performs reasonably

well with significant value of the Chi-square and of the area under the ROC curve and with a

satisfactory percentage of correctly predicted observations. The low value of the pseudo R-

square is not fully satisfactory but it must be noted that the pseudo-R2 is not analogous to the

R2 in linear regression though there is an empirical relationship between the two, and a

pseudo-R2 of 0.2 represents an R

2 of approximately 0.4 (Hensher et al. 2005). The main

results are reported in the following table.

17

Table 3 : Logistic regression results:

Variable name Model 1 Model 2

Fun

ctio

n m

ain

ly

invo

lved

in

the

ag

reem

.

Infras .1472

(.1776)

.1648

(.1756)

R&D -.4986** (.2175)

-.5039** (.2163)

Proc -.0690

(.2962)

-.1021

(.2913)

Logistic -.2271

(.2598)

-.2386

(.2559)

Prod .9215*** (.2047)

.9487*** (.2022)

Mkting -.3879**

(.1748)

-.3554**

(.1722)

Indu

stry

sec

tor

S_primary 1.263** (.6268)

1.307** (.6184)

S_trad 2 .2725

(.2967)

.2547

(.2942)

S_Scale 3 0.324

(.2365)

.0550

(.2307)

S_Spec 4 .2817 (.3272)

.3040 (.3201)

S_Science 5 1.234**

(.5559)

1.265**

(.5519)

S_energy 6 .3828

(.3010)

.3702

(.2953)

S_trade 7 -.2009

(.3057)

-.1822

(.3025)

Invpro

-.1110

(.0821)

-.0949*

(.0513)

Enfcon -.0004

(.0007)

-.0008**

(.0004)

Costri

-.0130 (.0132)

-.0139* (.0077)

Cult-dist

-.1901

(.1330)

-.2038*

(.1132)

Siz

e

Small -.6418 (.4704)

-.6100 (.4642)

Medium -.5298***

(.2012)

-.5156***

(.1990)

Compet

-.0529** (.0253)

-.0545*** (.0186)

Rating

.0084

(.0143) -

Inte

rna

tion

str

ate

gy

Risk -.1305

(.2027)

-.1491

(.2006)

Scale -.1588 (.2103)

-.1813 (.2065)

Compl-tech -.1532

(.1900)

-.1539

(.1877)

Comp -.1310

(.1750)

-.1206

(.1723)

Barriers -3119

(.2989)

-.2107

(.2747)

Int exp .3770** (.1691)

.3915** (.1658)

Log-likelihood; Chi-square (36, 26)

Pseudo-R2

Correctly classified Area under ROC curve =

-540.04403 132.72

0.1094

65.64% 0.7124

-543.50815 125.80

0.1037

64.62% 0.7061

Notes: (1) The sample consists of 879 observations; (2) For model 1 estimation results

for the geographical area dummies are not reported in the table for the sake of simplicity. None of the variables not reported are statistically significant (3) Standard

errors are in brackets. The symbol * denotes that the coefficient is significant at the

10% level, ** 5% level and *** at a 1% level

4 Results and Discussion

18

Since the results are robust for both models, we refer our analysis only to the more restricted

model. The results of the logistic regression analysis provide support for some of our

hypotheses but not for all of them.

Hypothesis 1 is not supported by the results of the statistical analysis. The coefficient for the

dummy variable R&D is significant, but has a negative sign and not, as expected, a positive

sign. When the R&D function is concerned, firms prefer to use non-equity alliances rather

than joint ventures. We developed hypothesis 1 on the basis of Transaction cost theory

considerations. The result of our analysis seems to challenge this view. Our results show that

uncertainty and the risk of opportunistic behavior can be dealt with by a firm, even with less

integrated forms that, at the same time, guarantee speed of execution and low costs of

bargaining. Unfortunately, due to lack of data, we could not consider the kind of knowledge

that is transferred through the JV or the agreement. Both Meyer et al. (2009a) and Lòpez-

Duarte and Garcìa-Canal (2002) underline how it is the kind of knowledge sought by a firm

that affects the market entry choice.

Hypothesis 2 predicting that, in science sectors, firms tend to prefer joint ventures appears to

be confirmed. Our analysis supports the transaction cost view that asset specificity has a

positive impact on the choice between hierarchical (equity) and non hierarchical modes of

governance. From this point of view, our results confirm previous findings (Hennart and

Larimo 1998; Brouthers 2002) in the new context that we have analysed.

The same applies to the hypothesis that concerns the level of legal protection and political

hazard in the target country. Hypothesis 3a and 3b jointly state that, when the legal protection

in a country is low and political hazard is high, firms prefer to set up a joint venture with a

local partner in order to have some kind of hedging against political risk. This result is

statistically significant (even if only in the restricted model) and confirms previous results

19

(Delios and Henisz 2003) regarding the role that the legal and political environment plays in

affecting firm entry mode choice. Our results suggest that high political risk pushes firms to

enter foreign markets with an equity form (JV) rather then with a non-equity agreement.

Considering the control variables, it must be noted that, with the notable exception of the

rating grade, and even if at a different level, all the indexes that define the host country

characteristics are significant. This result reinforces the view that economic and political

features of the host country are important.

Similarly, the hypothesis regarding the effects of cultural distance on alliance mode choice is

confirmed (Hypothesis 4), even if only at the 10% level of significance.

Finally, hypothesis 5 regarding the role of size has the expected sign for both small and

medium sized firms but it is significant only for the medium sized firm variable. Resources

seem to be an important determinant of the choice of alliance mode. Prior research tends to

concentrate only on large firms which have been the main players in the international arena.

The exploration of small and medium sized firms however seems a promising line of research

and we think that our results offer some useful insights in this field. Moreover, our findings

provide further support for the resource-based view that is at the basis of our hypothesis and

that has increasingly been used in IB research. A more integrated approach that merges TC

economic with a RBV approach could be a useful staring point for research on cooperative

alliances.

5. Conclusions, managerial relevance and limitations

This study is an attempt to empirically test the role of five factors on the choice between joint

ventures and non-equity alliances: firm size, activities of the value-chain concerned by the

agreement, industrial sector, host country institutional characteristics and cultural distance.

20

Our findings confirm that the factors we have explored do have, at different degrees, an effect

on this alternative. We refer more specifically to the effect of country risk and legal protection

on alliance mode choice. In our case the usual conclusion drawn by scholars (Contractor &

Kundu, 1998), using TC economics, have been reversed. Our findings show that more

hierarchical modes of entry are preferred when the level of political risk is high. This

conclusion needs further empirical validation but it suggests that not all the choices in the

entry mode range follow the same rationale. This result is significant both by the managerial

and the theoretical point of view. For business practitioners, it means that once a firm decided

to enter in a new market with a partner this choice is not only affected by efficiency

considerations, as it is typically assumed in the TC approach, but also by the kind of resources

available to the firm. Both TC theory and a RBV approach seem to highlight different

determinants. Consequently, from the theoretical point of view, our results call for a more

integrated approach that combines the strengths of both theoretical perspectives. Finally, our

analysis shows that host country characteristics influence the alliance mode choice, but that

institutional features are also relevant. Further development of this idea seems a very

promising stream of research.

Notwithstanding these encouraging results, we are well aware that certain limitations of the

study should be born in mind. The first limitation is given by the single institutional setting

that we use. All the firms in our sample are Italian so we could not differentiate firms

according to the country of origin. We are aware that empirical findings in management are

usually context specific and that any generalisation out of the specific context is difficult.

Secondly, we could not control for other factors that are important in the alliance mode

selection process such as the level of international experience or the degree of

internationalisation, the intangible intensity and the kind of knowledge transferred through the

21

agreements. Therefore, further analysis of the joint venture - non-equity alliance alternative

that will include these factors would contribute to a better understanding of this choice.

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